Crisis Could Be New Business Opportunity in Disguise
The author is an analyst of NH Investment & Securities. She can be reached at mj27@nhqv.com. -- Ed.
Domestic F&B companies’ evolution into global players to hinge upon successful localization and M&As
Over the past few years, major domestic F&B companies have been turning their eyes to overseas markets, in a bid to overcome the limited growth potential of the domestic market. Korea’s F&B market has been maturing, with its population growth stalled. Against this backdrop, advances into rapidly-developing overseas markets should provide new growth opportunities for domestic companies. In particular, thanks to the rapid spread of K-culture across the world including food, pop music, and beauty products, we believe that the foundation for Korean F&B firms’ overseas market entry has been well laid. More specifically, the rising popularity of Korean boy/girl groups (led by BTS) and the movie Parasite’s winning of several Academy Awards have helped to greatly strengthen the foreign population’s interest and understanding of Korean culture and consumer goods. More diverse racial demographics, instant global communications via social networking sites, and rising numbers of Koreans residing in foreign countries are all factors that are helping to promote the spread of Korean consumer goods across the world.
In our view, the Covid-19 crisis that has boosted household food demand on a global level should serve to expand foreign consumers’ purchase of Korean food products available in their respective markets. Prior to the Covid-19 eruption, Korea firms have prepared for overseas market advances via distribution channel expansion and M&As with local companies, and external market environments have been turning favorable for their success. And, the breakout of Covid-19 pandemic against this backdrop is expected to serve to broaden overall consumer base for Korean food products in overseas markets.
Case studies: Coca Cola and Nestle
Looking at the growth story of global F&B companies, we found that overseas market advances and M&As are the two keywords that summarize their growth history. In particular, in the past when transportation of products was not as free as today’s, extraordinary events such as a war provided small local F&B firms with an opportunity to go abroad. In today’s market, F&B companies have entered overseas markets by diversifying product portfolios and securing local distribution/logistics networks through M&As with local players.
Coca Cola, which was invented as a migraine medicine, had become a global household name through World War II. As the US government included Coca Cola in the food supply kit for US soldiers stationed in different countries around the world, it is estimated that during the war, about 16mn soldiers around the world drank approximately 10bn Coca Colas.
In addition, Nestle’s ascent to a global beverage company owes much to the World War II. After the US entered the war in 1941, Nescafé became a staple beverage of American servicemen, and they enjoyed a hot cup of coffee in the cold trenches of the World War II. Even after the war was over and soldiers returned to their home, US soldiers still enjoyed drinking Nestle’s Nescafe. In keeping, Nestle’s sales soared from US$100mn in 1938 to US$225mn in 1945.
Business portfolio diversification via M&As
We note that many global F&B companies have pursued growth via M&A strategies. For example, Coca Cola emerged as a comprehensive beverage player via the acquisition of Minute Maid in the 1960s. The company sought to further diversify its product portfolio through the acquisition of Costa Coffee, the world’s second-largest coffeehouse chain, at a price of GBP3.9bn (around W5.6tn).
Meanwhile, Nestle first started as a baby food producer, but after WWI, it successfully expanded its business portfolio to include a coffee business via the takeover of Peter, Cailler, and Kohler Swiss General Chocolate Company. In the post-WWII era, Nestle acquired the French yogurt and desert company Chambourcy, and in 1992, Perrier, a bottled water company, was incorporated. The series of M&As propelled Nestle into becoming a global food player.